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2 Understanding and Analyzing the General Environment and the Health Care Environment

“Whether you think you can or whether you think you can 't, you 're right!”

—HENRY FORD

Introductory Incident

Not-for-profi t Status for Hospitals: Is Community Benefi t Equal to Lost Tax Revenue?

Because of the Great Recession, local and state governments have cut school budgets, person-

nel, and infrastructure – items noticed by taxpayers/voters. Cash-strapped states are looking

for ways to “fi nd” funds. One area that has been increasingly targeted is the tax-exempt status

of not-for-profi t hospitals that often are taking in huge amounts of revenue and not paying any

kind of taxes. Prior to 1969, hospitals were exempt from taxes because they “serve the public

good by caring for patients in the community who cannot aff ord the medical care they need.”

Ginter, Peter M.. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2013. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1138986. Created from apus on 2019-05-07 18:11:34.

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34 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

As communities watch hospitals build new buildings, pay CEOs high salaries, and purchase

the latest technologies, the question arises: “What percent of the hospital 's revenues goes

toward uncompensated medical care?” For some hospitals, it is less than 1 percent; neverthe-

less, the hospital pays no property tax (local), income tax (state and federal), sales tax (local,

county, state), or capital gains/earnings tax on investments. For example, BJC Hospital in

St. Louis made $372 million in investments this past year (not taxed), plus issued tax-free bonds

(an additional tax loss).

The Illinois Department of Revenue revoked the not-for-profi t status of Provena Covenant

Medical Center in 2004 because it did not provide suffi cient charity care ($800,000 on $113

million in revenue). Appeals were denied as the court found that the Urbana hospital failed to

justify its exemption by providing charity care to less than one-half of 1 percent of the patients

it served in 2002. Three additional Illinois hospitals, Northwestern Memorial Hospital 's Prentice

Women 's Hospital in Chicago (1.85 percent charity care), Edward Hospital in Naperville (1.04

percent charity care), and Decatur Memorial Hospital in Decatur (0.99 percent charity care), were

denied renewal of not-for-profi t status in 2011 and 15 others were under investigation when

the Governor asked for new legislation that would defi ne criteria for hospitals to qualify for tax-

exempt status. In a press release dated January 11, 2012, the Illinois Hospital Association (IHA)

announced that non-profi t hospitals in the state contributed $4.6 billion in community benefi ts

($561 million for free or discounted care at cost) in the 2009–10 fi scal year – a 124 percent

increase over 2005. IHA proposed that the new legislation expand the defi nition of charity in

the tax code to include not only free medical care to the indigent but also programs and losses

that hospitals incur under Medicaid, with reimbursement rates are well below market rates

(an issue of hospitals wanting to look at “charges” versus “costs” in determining charity care).

The Illinois State Supreme Court ruled in 2010 that discounts given to the state 's Medicaid pro-

gram could not be considered charity care.

Since 1969, the IRS has not specifi cally required hospitals to provide charity care in order to

be exempt from federal taxation and have access to tax-exempt bond fi nancing and charitable

donations, as long as the hospital provides benefi ts to the community in other ways (an IRS rul-

ing brought about this change in response to the mandate that emergency rooms had to be

open to all members of the community without regard for ability to pay). The 1969 ruling identi-

fi ed other factors that might support a hospital 's tax-exempt status, such as having a govern-

ance board composed of community members and using surplus revenue to improve facilities,

patient care, medical training, education, and research.

Perhaps Boston Children 's Hospital has the right approach. To demonstrate the value

that Boston Children 's provides to the community, it hired Ernst & Young to calculate what

it would owe in local, state, and federal taxes if it were a for-profi t hospital. According to

the accounting fi rm 's calculation, in FY 2010, Boston Children 's would owe $43.8 million in

taxes as a for-profi t hospital (and Ernst & Young included every possible tax). Children 's then

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35CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

calculated the community benefi ts it has delivered as defi ned by the new IRS guidelines,

using a conservative projection: $244.6 million in benefi ts to taxpayers in exchange for its

tax-exempt status.

REFERENCES

1. GAO, “Nonprofi t, For-profi t, and Government Hospitals: Uncompensated Care and Other Community

Benefi ts,” GAO-05-743T, May 26, 2005.

2. Internal Revenue Service, “IRS Exempt Organizations (TE/GE) Hospital Compliance Project, Final Report,”

February 10, 2009.

3. Kathy Bergen, “Illinois Department of Revenue Denies Tax Exemption for 3 Hospitals,” Chicago Tribune ,

August 17, 2011, Business p. 1.

4. www.childrenshospital.org

Learning Objectives

After completing the chapter you will be able to:

1. Appreciate the signifi cance of the external environment's impact on health care

organizations.

2. Understand and discuss the specifi c goals of external environmental

analysis.

3. Point out some limitations of external environmental analysis.

4. Describe the various types of organizations in the general and health care

environments and how they create issues that are of importance to other

organizations.

5. Identify major general and industry environmental trends aff ecting health care

organizations.

6. Identify key sources of environmental information.

7. Discuss important techniques used in analyzing the general and health care

environments.

8. Conduct an analysis of the general and industry external environments for a

health care organization.

9. Suggest several questions to initiate strategic thinking concerning the

general and industry environments as a part of managing strategic momentum.

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http://www.childrenshospital.org

36 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

The Importance of Environmental Infl uences

Fifty years ago the delivery of health care was a relatively uncomplicated rela- tionship of facilities, physicians, and patients working together. Government and business stood weakly on the fringes, having little signifi cant infl uence. Today, a multitude of interests are directly or indirectly involved in the delivery of health care. For instance, the for-profi t provider segment has grown dramatically; private-sector businesses are largely responsible for the development and deliv- ery of drugs, medical supplies, and many technical innovations; and government agencies regulate much of the actual delivery of health care services. As a result, in their quest for competitive advantage, organizations are investing increasingly more time and money in collecting and organizing information about the world in which they operate. 1

Ultimately, strategic thinking is directed toward positioning the organization most effectively within its changing external environment. Peter Drucker writes, “The most important task of an organization 's leader is to anticipate crisis. Perhaps not to avert it, but to anticipate it. To wait until the crisis hits is already abdication. One has to make the organization capable of anticipating the storm, weathering it, and in fact, being ahead of it.” 2 Therefore, to be successful, health care organization leaders must have an understanding of the external environ- ment in which they operate; they must anticipate and respond to the signifi cant shifts taking place within that environment. Strategic thinking, and the incorpo- ration of that thinking into the strategic plans for the organization, is now more important than ever. Futurist Joel Barker has suggested that “in times of turbu- lence the ability to anticipate dramatically enhances your chances of success. Good anticipation is the result of good strategic exploration.” 3 Organizations that fail to anticipate change, ignore external forces, or resist change will fi nd themselves out of touch with the needs of the market, especially because of anti- quated technologies, ineffective delivery systems, and outmoded management. Institutions that anticipate and recognize signifi cant external forces and modify their strategies and operations accordingly will prosper.

Evolving External Issues One of the greatest challenges for health care organizations is identifying the changes that are most likely to occur and then planning for that future. Interviews with health care professionals and a review of the health care literature suggest that health care organizations will have to cope with change in some or all of the following areas: legislative/political, economic, social/demographic, techno- logical, and competitive. 4

Legislative/Political Changes

● Passage of the Affordable Care Act (ACA) in 2010: major reform legislation is in place and in 2012 was generally supported by the Supreme Court (only the mandate/penalty for Medicaid was disallowed, resulting in the right of states to opt out of that requirement). Different parts of the legisla- tion are being phased in, a few began immediately (for example, coverage

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37CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

of children to age 26), others begin in as late as 2014 (use of electronic health records by any provider that interacts with the US government, although in 2012 many players in the health care system were asking for an extension). The results of the 2012 presidential election suggest that the PPACA will remain in tact and further revisions are likely.

● Increased accountability for corporate governance (e.g., Sarbanes–Oxley).

● Employer-based insurance may diminish as the penalties to be paid under ACA for not providing insurance for employees are less than the cost of health insurance; more employees will likely shift to government accounts.

Economic Changes

● Health care by most measures is the US 's largest industry and biggest pri- vate employer. 6

● Procedure costs may be falling while total spending is rising. 7

● Employers will become more unwilling to shoulder the entire burden of increasing costs for health care insurance and health care for their employees and retirees.

● Over 49.9 million Americans are without health insurance in 2011 – a number that has been predicted to increase, but with ACA the number is unpredictable. Those previously uncovered may become insured through government programs, but the number of people already insured by employers may decrease, causing the total number of uninsured to increase. Or, if all the uninsured roll-over to government programs, will the cost be lowered or increased?

Social/Demographic Changes

● Without a truly radical adjustment in health care spending, which there is no reason to expect, demographics alone will drive health care 's share of GDP (gross domestic product) from the current 16 percent to as high as 25 percent. 8

● An aging population and increased average life span will place capacity burdens on some health care organizations while a lessening of demand threatens the survival of others. By 2020, the US population over the age of 65 is expected to reach 53.7 million.

● The Hispanic population, many of whom do not speak English or speak it poorly, will continue to grow. Hispanics have become the largest minor- ity population. By 2050, one out of four Americans will be Hispanic.

● A more ethnically diverse population will continue to develop.

● An increase in income disparity is expected – a critical factor in determin- ing health care delivery.

● “Tiered” access to health care is anticipated, with the division between the tiers becoming more extreme.

● There are predictions of critical shortages of non-physician health care professionals and primary care physicians, yet a surplus of physicians within some specialties and in some geographic regions.

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38 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Technological Changes

● The high costs of purchasing new, sophisticated, largely computer-based technologies to meet the demand for high-quality health care will con- tinue to rise.

● The ACA requirement for an electronic health record will supply copious amounts of data and many will struggle to turn it into information that will improve the quality of care, which will be used to determine pay- ments for hospitals and physicians (see Perspective 2–1 ).

● Signifi cant advances in medical information technology are anticipated, such as automation of basic business processes, clinical information inter- faces, data analysis, and telehealth.

● New technologies will emerge in the areas of drug design, imaging, mini- mally invasive surgery, genetic mapping and testing, gene therapy, vac- cines, artifi cial blood, and xenotransplantation (transplantation of tissues and organs from animals into humans).

Competitive Changes

● Further consolidation will be seen within the health care industry because of cost pressures and intensifi ed competition.

● The disintegration of some health care networks can be expected.

● Health care corporations will continue to expand into segments that have less regulation and into businesses outside the traditional health care industry.

● The importance of market niche strategies and services marketing will increase.

● Outpatient care and the development of innovative alternative health care delivery systems will continue to grow.

● The decreasing viability of many of the nation 's small, rural, and public hospitals means that there will be a reconfi guration of the rural health care delivery system.

● Increasing numbers of physician executives will have leadership roles in health care organizations.

● More emphasis will be on preventive care through wellness programs and healthy behaviors.

● An increased emphasis will be placed on cost containment and measure- ment of outcomes of care (cost/benefi t).

● A changing role for public health is expected, moving back to “core” activities (prevention, surveillance, disease control, assurance) and away from the delivery of primary care.

● A shortage of 800,000 nurses will occur by 2020. The Southern Regional Education Board, for example, estimates that in its 16-state region and the District of Columbia there will be 40,000 job openings for Registered Nurses every year until 2014. This, in spite of the fact that 26,000 quali- fi ed applicants were denied admission to nursing programs in the region due to shortages of the faculty and facilities necessary to train them.

● Pressure to reduce the costs of administration of health care will increase.

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39CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

PERSPECTIVE 2–1

Physicians as Data Analysts?

In the past physicians kept a few statistics, espe-

cially if they operated in a group practice. Patient

deaths and, if the MD were an obstetrician,

number of births, were the main activities they

counted. That is about to change – and rather

signifi cantly – as data sharing with the govern-

ment is becoming essential and will impact

how physicians are paid, receive bonuses, or

are penalized as our health care system moves

from a fee-for-service world to one that is value

based.

Medicare is required to phase a “value-

based modifi er” into physicians' groups of 25

or more in 2015. The value-based modifi er

payments would apply to all physicians in

2017. The Aff ordable Care Act has authorized

CMS to penalize physicians who do not par-

ticipate; up to 2 percent of allowable Medicare

charges, with the same amount as incentive

payments.

The American Medical Association (AMA) and

more than 60 other organizations (academies,

such as the American Academy of Orthopedic

Surgeons; colleges, such as the College of

Pathologists; societies, such as the Medical

Society of the State of New York; associations,

such as the Renal Association; and others)

pledged to help physicians better improve use of

the data, which includes insurer information, to

“enhance the quality and value of patient care.”

Failure by physicians to embrace data shar-

ing will be counterproductive. Eventually, “every

physician will be evaluated by quality resources

based on their information that would result

in bonuses or not,” according to Niall Berman,

director of the CMS Offi ce of Information

Products and Analysis. “We 're harnessing raw

data into actionable information at the point

of care.” CMS hasn 't much choice, Brennan said.

The organization can 't say a physician is “good

or bad” without data.

A specifi c area of concern for physicians

is the complexities of the reporting and the

methods CMS will use to evaluate quality to

determine pay scales when there are so many

diff erences in an individual service line with

many subspecialties. For example, an orthope-

dics practice refl ects many areas where there

may seem to be quality diff erences, but because

of variations in patient conditions not how the

work is performed. A sports-medicine physi-

cian may have lower costs because he/she sees

“sports-minded people” as opposed to a foot

and ankle surgeon who sees “patients who have

uncontrolled diabetes” that may cost more, but

it is not because of patient treatment but rather

due to the uncontrolled diabetes. Thus, the

physician quality reports may diff er dramatically

without a true refl ection of the quality of the

doctor 's work.

CMS offi cials acknowledge that they are still

sorting out the role of subspecialties, but they

believe a “tiered” structure would be imple-

mented to take into account such quality diff er-

ences among patient conditions.

Source: Joe Cantlupe, “Data Changes the Doctors' Game,”

HealthLeaders Media , August 23, 2012, online.

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40 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

The External Nature of Strategic Management

Strategic thinking, strategic planning, and managing strategic momentum should be directed toward positioning the organization most effectively within its changing environment. Environmental analysis is a part of the situational analysis section of the strategic thinking map presented in Exhibit 1–1 . The conclusions reached in environmental analysis will affect the directional strate- gies and internal analysis. Environmental analysis is largely strategic thinking and strategic planning, and consists of understanding the issues in the external environment to determine the implications of those issues for the organization.

Environmental analysis requires externally oriented strategic managers who search for ways to radically alter the status quo, create something totally new, or revolutionize processes. They search for opportunities to do what has never been done previously or to do known things in a new way. Therefore, the fundamen- tal nature of strategic management requires the awareness and understanding of outside forces. Strategic managers encourage adoption of new ideas in the system, maintain receptivity to new ways of doing things, and expose themselves to broad views. Environmental analysis can remove the protective covering in which organizations often seal themselves. 9 Effective environmental analysis occurs through strategic thinking. This chapter concerns methods to assess the general environment and the health care environment, and Chapter 3 focuses on analysis methods to evaluate the service area and competitors within it.

Determining the Need for Environmental Analysis

Based on extensive experience in the business sector, A. H. Mesch developed a series of questions to determine if an organization needs environmental analysis. 10 The questions are equally relevant to health care organizations and include:

1. Does the external environment infl uence capital allocation and decision- making processes?

2. Have previous strategic plans been scrapped because of unexpected changes in the environment?

3. Has there been an unpleasant surprise in the external environment?

4. Is competition growing in the industry?

5. Is the organization or industry becoming more marketing oriented? 6. Do more and different kinds of external forces seem to be infl uencing

decisions, and does there seem to be more interplay between them?

7. Is management unhappy with past forecasting and planning efforts?

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41CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

These questions concern the general and health care industry environments as well as the service area. Answering “yes” to any of the questions suggests that management should consider some form of environmental analysis. Answering “yes” to fi ve or more of the questions indicates that environmental analysis is imperative. In today 's dynamic environment, most health care managers would probably answer “yes” to more than one of these questions and should therefore be performing environmental analysis – assessing trends, events, and issues in the general environment, the health care industry environment, and the service area.

External environmental analysis attempts to identify, aggregate, and interpret environmental issues as well as provide information for the analysis of the inter- nal environment and the development of the directional strategies. Therefore, environmental analysis seeks to eliminate many of the surprises in the external environment. Organizations cannot afford to be surprised. As one writer has pointed out, “to the blind all things are sudden.” The elimination of surprises is an appropriate goal because even in periods of dynamic, rapid transforma- tion, there are vastly more elements that do not change than new things that emerge. 11

Strategic managers who practice environmental analysis are so “close” to the environment that by the time change becomes apparent to others, they have already detected the signals of change and have explored the signifi cance of the changes. These managers are often called visionaries; however, vision is often the result of their strategic awareness – thoughtful detection and interpreta- tion of subtle signals of change. Such strategic managers are able to eliminate “predictable surprises” for the organization – surprises that shouldn 't have been. These managers are able to avoid disasters by recognizing the issue, making it a priority in the organization, and mobilizing the resources required to address it. 12

The lack of forecasting and planning success is sometimes the result of directing processes internally toward effi ciency rather than externally toward effectiveness. Such planning systems have not considered the growing num- ber and diversity of environmental infl uences. Early identifi cation of external changes through environmental analysis will greatly enhance the planning efforts in health care organizations. For example, according to the Nashville Business Journal (September 14, 2012), HCA Holdings, Community Health Systems, and LifePoint Hospitals are attempting to anticipate whether or not Tennessee will participate in the Medicaid expansion allowed under the Patient Protection and Affordable Care Act (PPACA). If Tennessee opts out, Nashville 's for-profi t hospitals could miss out on $22.7 billion in Medicaid reimbursements in 2014 alone. The problem is more complex. In addition, Nashville companies operate 51 hospitals in Texas. If Texas opts out, Nashville health care organiza- tions could miss out on their share of the $9.3 billion that would go to Texas during the fi rst year. As discussed in Perspective 2–2 , another shift in the exter- nal environment to which health care organizations must successfully respond is emergency and disaster preparedness.

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42 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

PERSPECTIVE 2–2

Preparedness: An Evolving External Issue for Health Care Organizations in the 21st Century

Public health threats are always present.

Whether caused by natural, accidental, or

intentional means, these threats can lead

to the onset of public health incidents.

Being prepared to prevent, respond to,

and rapidly recover from public health

threats is critical for protecting and secur-

ing our nation 's public health. 1

Following September 11, 2001, a signifi cant

increased emphasis was directed by the US gov-

ernment to improve the capability and capacity

of health care organizations to deal with large-

scale disasters of all types. Although it is widely

accepted that all responses are local, the strategy

for preparing for and planning local responses has

been infl uenced by national mandates from both

the Department of Health and Human Services

(HHS) and the Centers for Disease Control and

Prevention (CDC). Both agencies provide fund-

ing and technical assistance to state, local, and

territorial public health departments through

the Hospital Preparedness Program (HPP) and

Public Health Emergency Preparedness (PHEP)

Cooperative Agreements. These agreements pro-

vide resources that facilitate preparing hospitals,

health care systems, and their community part-

ners to prevent, respond to, and rapidly recover

from mass casualty incidents (MCIs) and medical

surges to the nation 's hospital and health care

system. 2 Legislative resource commitments are

provided through the Pandemic and All-Hazards

Preparedness Act (PAHPA).

The primary role of the federal government

is the coordination of interagency response

to a disaster incident. The National Response

Framework organizes interagency response into

15 essential support functions (ESFs), which are

groupings of functions most frequently used to

provide federal support to states. The ESF focus-

ing on public health and the one of primary

interest to health care organizations is ESF#8 –

Public Health and Medical Services. The scope of

ESF#8 is broad, with responsibility for providing

supplemental assistance in the following core

functions:

● Assessment of public health/medical needs.

● Health surveillance.

● Medical care personnel.

● Health/medical/veterinary equipment and

supplies.

● Patient evacuation.

● Patient care.

● Safety and security of drugs, biologics, and

medical devices.

● Blood and blood products.

● Food safety and security.

● Agriculture safety and security.

● All-hazard public health and medical consul-

tation, technical assistance, and support.

● Behavioral health care.

● Public health and medical information.

● Vector control.

● Potable water/wastewater and solid waste

disposal.

● Mass fatality management, victim identifi ca-

tion, and decontaminating remains.

● Veterinary medical support.

The PHEP and HPP cooperative agreements

translate into new demands and interactions

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43CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

for health care organizations. For example,

health care organizations may be required or

requested to participate in the development of

health care coalitions with other ESF#8 partners.

Some states may require that in order to be

licensed, hospitals must participate in the state 's

hospital preparedness program while in other

states, participation is voluntary. Participation

in preparedness activities may involve fi nancial,

human, and facilities resources. It is important

for health care organizations to understand the

requirements and expectations of state and

local authorities concerning preparedness

and to incorporate these expectations into the

environmental assessment.

In addition, health care organizations

must consider stakeholders such as the Joint

Commission, the Association of State and

Territorial Health Offi cials (ASTHO), the National

Association of County and City Officials

(NACCHO), the American Hospital Association

(AHA), the American Academy of Pediatrics (AAP),

the Federal Emergency Management Agency

(FEMA), and state and local emergency man-

agement agencies and health departments.

These stakeholders collaborate to defi ne and

operationalize public health preparedness

capabilities. 3

Natural and human-initiated disaster pre-

paredness will continue to infl uence health

care organization strategy. Planning and pre-

paring for hurricanes, earthquakes, tornados,

human-initiated incidents, and other types of

disaster is now a part of health care organiza-

tion strategy. In addition, as new preparedness

approaches, directives, and laws are created,

health care organizations will have to respond

accordingly.

Source: Andrew C. Rucks and Lisa C. McCormick, Department of

Health Care Organization and Policy, University of Alabama at

Birmingham.

1 US Department of Health and Human Services, Centers for

Disease Control and Prevention (2011) Public Health Preparedness

Capabilities: National Standards for State and Local

Planning. Available at: http://www.ndhealth.gov/epr/php/

PHEP%20Capabilities%202011.pdf

2 US Department of Health and Human Services, Offi ce of the

Assistant Secretary for Preparedness and Response (2012)

Healthcare Preparedness Capabilities: National Guidance for

Healthcare System Preparedness. Available at: http://www.phe.gov/

preparedness/planning/hpp/reports/documents/capabilities.pdf

3 FEMA (2008). Emergency Support Function Annexes:

Introduction. Available at: http://www.fema.gov/pdf/emergency/

nrf/nrf-esf-all.pdf

The Goals of Environmental Analysis Although the overall intent of environmental analysis is to position the organiza- tion within its environment, more specifi c goals may be identifi ed. The specifi c goals of environmental analysis are:

● to identify and analyze current important issues and changes that will affect the organization;

● to detect and analyze early or weak signals of emerging issues and changes that will affect the organization;

● to speculate on the likely future issues and changes that will have signifi - cant impact on the organization;

● to classify and order issues and changes generated by outside organizations;

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http://www.ndhealth.gov/epr/php/PHEP%20Capabilities%202011.pdf

http://www.phe.gov/preparedness/planning/hpp/reports/documents/capabilities.pdf

http://www.fema.gov/pdf/emergency/nrf/nrf-esf-all.pdf

44 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

● to provide organized information for the development of the organization 's internal analysis, mission, vision, values, goals, and strategy; and

● to foster further strategic thinking throughout the organization.

In addition to the identifi cation of current issues, environmental analysis attempts to detect early or weak signals within the external environment that may portend a future issue. Sometimes based on little hard data, managers attempt to identify patterns that suggest emerging issues that will be signifi cant for the organization. Such issues, if they continue or actually do occur, may represent signifi cant challenges. Early identifi cation aids in developing strategy.

Strategic managers must go beyond what is known and speculate on the nature of the industry, as well as the organization, in the future. This process often stimulates creative thinking concerning the organization 's present and future products and services. Such speculation is valuable in the formulation of a guiding vision and the development of mission and strategy. The bulleted list of evolving external issues at the beginning of this chapter provides some of the emerging and speculative forces that strategic managers will begin to incorpo- rate into their thinking today.

There is an abundance of data in the external environment. For it to be meaningful, managers must identify the sources as well as aggregate and clas- sify the data into information. Once classifi ed, important issues that will affect the organization may be identifi ed and evaluated. This process encourages managers to view environmental changes as external issues that may affect the organization.

When strategic managers – top managers, middle managers, and front-line supervisors – throughout the organization are considering the relationship of the organization to its environment, innovation and a high level of service are likely. Strategic thinking within an organization fosters adaptability, and those organizations that adapt best will ultimately displace the rest.

The Limitations of Environmental Analysis Environmental analysis is important for understanding the external environment, but it provides no guarantees for success. The process has some practical limita- tions that the organization must recognize. These limitations include:

● Environmental analysis cannot foretell the future.

● Managers cannot see everything.

● Sometimes pertinent and timely information is diffi cult or impossible to obtain.

● There may be delays between the occurrence of external events and man- agement 's ability to interpret them.

● Sometimes there is a general inability on the part of the organization to respond quickly enough to take advantage of the issue detected.

● Managers' strongly held beliefs sometimes inhibit them from detecting issues or interpreting them rationally. 13

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45CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

Even the most comprehensive and well-organized environmental analysis pro- cesses will not detect all the changes taking place. Sometimes events occur that are signifi cant to the organization but were preceded by few, if any, signals. Or the signals may be too weak to be discerned.

Perhaps the greatest limiting factor in external environmental analysis is the preconceived beliefs of management. In many cases, what leaders already believe about the industry, important competitive factors, or social issues inhibits their ability to perceive or accept signals for change. Because of managers' beliefs, sig- nals that do not conform to what they believe may be ignored. What an individual actually perceives is dramatically determined by paradigms (ways of thinking and beliefs). And any data that exist in the real world which do not fi t the paradigm will have a diffi cult time permeating the individual 's fi lters – he or she will sim- ply not see it. 14 As creativity expert Edward De Bono explains, “We are unable to make full use of the information and experience that is already available to us and is locked up in old structures, old patterns, old concepts, and old percep- tions.” 15 Despite long and loud signals for change, in some cases organizations do not change until it is too late.

The External Environment

Organizations and individuals create change. Therefore, if health care managers are to become aware of the changes taking place outside their own organization, they must have an understanding of the types of organizations that are creat- ing change and the nature of the change. Exhibit 2–1 illustrates the concept of the external environment for health care organizations. In this chapter we will explore the types of change initiated in the general environment and the health care industry environment.

Components of the General Environment All types of organizations and independent individuals generate important issues – and subsequently change – within the general environment. For exam- ple, a research fi rm that is developing imaging equipment may introduce a new technology that could be used by a variety of other organizations in very diverse industries such as hospitals (magnetic resonance imaging) and manufacturing (robotics). The members of the general environment may be broadly classifi ed in a variety of ways depending on the strategic management needs of the organiza- tion analyzing the environment. These groups of organizations and individuals make up the broad context of the general environment:

● government institutions,

● business organizations,

● educational institutions,

● religious institutions,

● research organizations and foundations, and

● individuals and consumers.

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46 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Organizations and individuals in the general environment, acting alone or in concert with others, initiate and foster the “macroenvironmental” changes within society. These organizations and individuals generate legislative/political, economic, social/demographic, technological, and competitive change that will, in the long run, affect many different industries (including health care) and may even directly affect individual organizations. Therefore, external organizations engaged in their own processes and pursuing their own missions and strategic goals will affect other industries, organizations, and individuals.

In the general environment, changes usually affect a number of different sectors of the economy (industry environments). For example, passage of the prescription drug bill during the George W. Bush presidency affected a variety of organizations as well as individuals including insurance companies, organiza- tions representing the elderly, and retirees. Similarly, the early health care reform initiatives of the Obama administration resulted in the passage of ACA, however, its implementation was spread over a number of years and affected virtually all institutions in the general environment, not just health care organizations.

The General Environment

• Government Institutions • Business Organizations • Educational Institutions • Religious Institutions • Research Organizations/

Foundations • Individuals/Consumers

The Health Care Environment

• Planning/Regulatory Organizations

• Primary Providers • Secondary Providers • Provider Representatives • Individuals/Patients

• Competitors • Government Services • Business Organizations • Non-profit Organizations • Other Local Organizations • Individuals/Consumers

Demographics Psychographics Health Status

Impact the

Organization

The Service Area

Impact the

Organization

Impact the

Organization

EXHIBIT 2–1 The External Environment of a Health Care Organization

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47CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

The organization itself may be affected directly by the legislative/political, economic, social/demographic, technological, and competitive change initiated and fostered by organizations in the general environment. In the aggregate, these alterations represent the general direction of societal change that may affect the success or failure of any organization. Therefore, an organization engaging in strategic management must try to sort out the fundamental changes being generated in the external environment and detect the major shifts taking place. A shift in consumer attitudes and expectations about health care is an example of a societal change that may affect the success or failure of health care organizations. Demographic changes are somewhat more predictable and the growing number of seniors in the US population will impact every aspect of the environment as well as the health care environment. However, sometimes the demographics of the general environment can provide leading health care trends, as illustrated in Perspective 2–3 .

Typically, as information is accumulated and evaluated by the organization, it will be summarized as environmental issues affecting the industry or organiza- tion. The identifi cation and evaluation of the issues in the general environment are important because the issues will accelerate or retard changes taking place within the industry yet may affect the organization directly as well.

Components of the Health Care Environment Organizations and individuals within the health care environment develop and employ new technologies, deal with changing social and demographic issues, address legislative and political change, compete with other health care organiza- tions, and participate in the health care economy. Therefore, strategic managers should view the health care environment with the intent of understanding the nature of all these issues and changes. Focusing attention on major change areas facilitates the early identifi cation and analysis of industry-specifi c environmental issues and trends that will affect the organization. However, in today 's environment a more focused service area competitor analysis is typically required as well (see Chapter 3).

PERSPECTIVE 2–3

The Largest Minority Impacting Health Care Delivery

As of mid-year 2009, Hispanics became the larg-

est and fastest-growing ethnic or race minority

in the United States, with more than 48.4 mil-

lion people. Hispanics constitute 16 percent

of the nation 's total population, with a median

age of 27.4 years (compared with 36.8 years

for the US population as a whole). Factors that

contribute to poor health outcomes among

Hispanics include language (unwillingness to

try to speak with a health care provider and

confusion over medical information provided),

cultural barriers, lack of access to preventive

care, and lack of health insurance (especially

illegal immigrants).

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48 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Access to care is uneven for many Hispanics.

In one study comparing a group of Hispanics

living in Minnesota where they were a small

percentage of the population to a group living

in Texas where they were the largest minority

population, found those living in Minnesota

had access and good quality care whereas those

living in Texas felt they had limited access and

inferior quality care to that they could receive in

Mexico. Many (who were in the US legally and

could do so) travelled to Mexico for care and

especially for medications that were much less

expensive. In Minnesota the burden is not great

(lowest uninsured population in the USA at

8.42 percent and lowest uninsured Latinos

at 18 percent) compared with Texas (highest

uninsured population in the USA at 24.2 percent

and highest uninsured Latinos at 60 percent).

One way that the health care needs of

Hispanics are being met is in-store medical

clinics that off er aff ordable health care targeted

at Hispanic customers. This growing trend of

retail-based medical clinics could be particularly

benefi cial to retailers catering for Hispanics.

For example, Minyard Food Stores operates its

Carnival-banner as a Hispanic format, incorpo-

rating in-store medical centers called MedBasics.

Started in Texas locations, the in-store clinics

are staff ed by nurse practitioners and physician

assistants and charge about $49 for most non-

urgent services.

The clinics range from about 400 to 600

square feet. Although Carnival loses that foot-

print as retail space, it benefi ts from additional

store traffi c – 98 percent of MedBasics patients

use the Carnival pharmacy to fi ll their prescrip-

tions and while there customers often buy other

health-related items, such as over-the-counter

medications and Band-Aids. MedBasics centers

reach out to Hispanics with a range of services

including bilingual staff and paperwork, sig-

nage, and brochures in Spanish. In addition,

MedBasics partnered with several insurance

companies so that insured patients are typically

charged just a copay.

A similar concept has been eff ective at

Bashas 's Food City-banner stores in Phoenix,

Arizona. Its MediMin health care clinics employ

a bilingual staff and all communications are

in Spanish. The basic offi ce visit is $50 (or the

patient 's insurance copay). MediMin centers

are located at the front of the store, near the

pharmacy, in approximately 450 square feet of

space. A small patient waiting area, two exam

rooms, a small lab, and a bathroom provide the

look and feel of a doctor 's offi ce, but it 's better

because the clinics are staff ed seven days a week

with a nurse practitioner or physician 's assistant

plus an administrator who is fl uent in Spanish.

Bashas 's research revealed that all socioeconomic

groups – from blue-color workers to high-end

households – are using the clinics. The hospital

ERs like the concept as well.

Source: www.cdc.gov/nchs/fastats/hispanic_health.htm and www

.census.gov/hhes/www/hlthins/data/incpovhlth/2010/tables.html.

Carolyn Garcia, José A. Pagán, and Rachel Hardeman, “Context

Matters: Where Would You be the Least Worse Off in the US if You

Were Uninsured?” Journal of Health Policy 94, no. 1 (2010), pp. 76–83.

The wide variety of health care organizations makes categorization diffi cult. However, the health care system may generally be grouped into fi ve segments:

● Organizations that regulate primary and secondary providers.

● Organizations that provide health services ( primary providers ).

● Organizations that provide resources for the health care system ( second- ary providers ).

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http://www.census.gov/hhes/www/hlthins/data/incpovhlth/2010/tables.html

49CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

● Organizations that represent the primary and secondary providers.

● Individuals involved in health care and patients (consumers of health care services). 16

Exhibit 2–2 lists the types of organizations and individuals within each seg- ment and provides examples. The categories of health care organizations listed under each of the health care segments are not meant to be all-inclusive, but

EXHIBIT 2–2

Organizations that Regulate Primary and Secondary Providers

● Federal regulating agencies:

Department of Health and Human Services (DHHS)

Center for Medicare and Medicaid Services (CMS)

● State regulating agencies:

Public Health Department

State Health Planning Agency (e.g., certifi cate of need [CON, see Perspective 3–3 ])

● Voluntary regulating groups:

Joint Commission on Accreditation of Healthcare Organizations (JCAHO)

● Other accrediting agencies:

Council on Education for Public Health (CEPH)

Primary Providers (Organizations that Provide Health Services)

● Hospitals:

Voluntary (e.g., Barnes/Jewish/Hospital)

Governmental (e.g., Veteran 's Administration Hospitals)

Investor-owned (e.g., HCA – The Healthcare Company, Tenet)

● State public health departments

● Long-term care facilities

● Skilled nursing facilities (e.g., HCR ManorCare)

● Intermediate care facilities

● HMOs and IPAs (e.g., United Healthcare)

● Ambulatory care institutions (e.g., Ambulatory Care Centers)

● Hospices (e.g., Hospice Care & Palliative Care, Inc.)

● Physicians' offi ces

● Home health care institutions (e.g., CareGivers Home Health)

Secondary Providers (Organizations that Provide Resources)

● Educational institutions:

Medical schools (e.g., Johns Hopkins, University of Alabama at Birmingham [UAB])

Schools of public health (e.g., The University of North Carolina at Chapel Hill, Harvard)

Schools of nursing (Presbyterian School of Nursing)

Health administration programs (University of Washington, The Ohio State University)

Organizations in the Health Care Environment

(Continued)

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50 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

● Organizations that pay for care (third-party payers):

Government (e.g., Medicaid, Medicare)

Insurance companies (e.g., Prudential, Metropolitan)

Businesses (e.g., Microsoft, Ford Motor Company)

Social organizations (e.g., Shriners, Rotary Clubs)

● Pharmaceutical and medical supply companies:

Drug distributors (e.g., McKesson)

Drug and research companies (e.g., Bristol Myers Squibb)

Medical products companies (e.g., Johnson & Johnson)

Organizations that Represent Primary and Secondary Providers

● American Medical Association (AMA)

● American Hospital Association (AHA)

● State associations (e.g., Illinois Hospital Association, New York Medical Society)

● Professional associations (e.g., Pharmaceutical Manufacturers Association [PMA],

American College of Healthcare Executives [ACHE], American College of Physician

Executives [ACPE], Medical Group Management Association [MGMA])

Individuals and Patients (Consumers)

● Independent physicians

● Nurses

● Non-physician professionals

● Non-professionals

● Patients and consumer groups

Source: Adapted from Beaufort B. Longest Jr., Management Practices for the Health Professional , 4th edn

(Norwalk, CT: Appleton & Lange, 1990).

rather to provide a starting point for understanding the wide diversity and com- plexity of the industry.

The Process of Environmental Analysis

There are a variety of approaches to conducting an environmental analysis. Regardless of the approach, four fundamental processes are common to envi- ronmental analysis efforts (see Exhibit 2–3 ): (1) scanning to identify signals of environmental change, (2) monitoring identifi ed issues, (3) forecasting the future direction of the issues, and (4) assessing the organizational implications of the issues. 17

EXHIBIT 2–2 (Continued)

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51CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

Scanning the External Environment As suggested earlier in this chapter, the external environment is composed of a number of organizations and individuals in the general and health care environ- ments. Some of the organizations and individuals in the external environment have little direct involvement with the health care industry while others are directly involved. The distinction is not always clear. These organizations and indi- viduals, through their normal operations and activities, are generating changes that may be important to the future of other organizations. Changes in the gen- eral environment are always “breaking through” to the health care environment. For example, health care often advances hand in hand with technology, as is the case with the convergence of imaging technology and biotechnology – enabled by advanced health care information technology – which promises to radically change diagnosis and treatment for many chronic diseases. 18

• View external environmental information • Organize information into desired categories • Identify issues within each category

Scanning

• Specify the sources of data (organizations, individuals, or publications)

• Add to the environmental database • Confirm or disprove issues (trends, developments,

dilemmas, and possibility of events) • Determine the rate of change within issues

Monitoring

• Extend the trends, developments, dilemmas, or occurrence of an event

• Identify the interrelationships between issues and between environmental categories

• Develop alternative projections

Forecasting

• Evaluate the significance of the extended (forecasted) issues to the organization

• Identify the forces that must be considered in the formulation of the vision, mission, internal analysis, and strategic plan

Assessing

EXHIBIT 2–3 Strategic Thinking Map of the Environmental Analysis Process

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52 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

The environmental scanning process acts as a “window” to these organiza- tions. These organizations and individuals are generating strategic issues that may shape the entire health care industry or have a direct impact on any one health care organization. Managers engaged in environmental scanning carry out three functions. They:

● view external environmental data;

● organize external information into several desired categories; and

● identify issues within each category.

Strategic issues are trends, developments, dilemmas, and possible events that affect an organization and its position within its environment. Strategic issues are often ill-structured and ambiguous and require an interpretation effort (fore- casting and assessment). 19 Often, in attempting to identify important external issues, general labels such as opportunities or threats are used to classify issues. However, the use of these labels leads strategists to think in terms of potential strategies to address the issue rather than the impact of the issue. Therefore, at this stage in strategic planning, it is benefi cial to avoid using the terms oppor- tunities/threats, positive/negative, gain/loss, or controllable/uncontrollable and instead consider the consequences of the issue itself. Strategies can be worked out later, after leaders have a better understanding of external issues as well as internal resources, competencies, and capabilities.

The scanning function serves as the organization 's “window” or “lens” on the external world. The scanning function is a process of viewing a number of exter- nal organizations either in the general or health care environment in search of current and emerging trends or issues. In the scanning process, planners focus on data generated by external organizations and individuals, and compile and organize it into meaningful categories. As a result, issues found in the external environment are organized through the scanning process. Prior to this interpre- tation process, issues are diverse, unorganized, sporadic, mixed, and undefi ned. The scanning process categorizes, organizes, accumulates, and, to some extent, evaluates issues.

Information Categories To effectively monitor and further analyze issues, they should be organized into logical categories. Categories not only aid in track- ing but also facilitate the subsequent assessment of the issues. The categories most used to classify issues are legislative/political, economic, social/demo- graphic, technological, and competitive. Issues, of course, are not inherently technological, social, and so on. However, using this approach helps managers to understand the nature of the issues and aggregate information and organize it. Through the aggregation and organization process, patterns may be identifi ed and evidence accumulated on an issue.

Information Sources There are a variety of sources for environmental information. Although organizations create change, they are often diffi cult to monitor directly. However, various secondary sources (published information) are readily available. Essentially, people and publications both outside and inside the organization serve as the lens to the external world. Typically, within the

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53CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

organization, there are a variety of experts who are familiar with external issues and who may be the best sources of such information. In addition, many organi- zations collect patient and consumer information and subscribe to and archive industry, technical reports, and databases. Outside the health care organization, patients, physicians, nurses, suppliers, third-party payers, pharmaceutical rep- resentatives, and managed care companies may be considered important direct sources. Indirect sources are mostly newspapers and journals, the Internet, tel- evision, libraries, and public and private databases.

Environmental scanning is perhaps the most important part of environmen- tal analysis because it forms the basis for the other processes. In the scanning activity, issues and changes are specifi ed and sources identifi ed. It is from this beginning that a database for decision making will be built. It is crucial that managers understand the thinking that led to the development and selection of strategic and tactical issues from among those identifi ed in the scanning process. It is therefore advantageous if as many managers as possible take part in scan- ning. An important aspect of environmental scanning is that it focuses leaders' attention on what lies outside the organization and enables them to create an organization that can adapt to and learn from that environment.

Monitoring the External Environment The monitoring function is the tracking of issues identifi ed in the scanning pro- cess. Monitoring accomplishes four important functions:

1. It researches and identifi es additional sources of information for specifi c issues delineated in the scanning process that were determined to be important or potentially important to the organization.

2. It adds to the environmental database. 3. It attempts to confi rm or disprove issues (trends, developments, dilem-

mas, and the possibility of events).

4. It attempts to determine the rate of change within issues.

The monitoring process investigates the sources of the information obtained in the scanning process and attempts to identify the organization or organiza- tions creating change and the sources reporting change. Once the organizations creating change and the publications or other information sources reporting change have been identifi ed, special attention should be given to these sources.

The monitoring function has a much narrower focus than scanning; the objective is to accumulate a database around an identifi ed issue. The database will be used to confi rm or disconfi rm the trend, development, dilemma, or pos- sibility of an event and to determine the rate of change taking place within the environment.

The intensity of monitoring is refl ected in management 's understanding of the issue. When managers believe they understand the issue well, less monitor- ing will be done. However, when environmental issues appear ill-structured, vague, or complex, the issues will require a larger amount of data to arrive at an interpretation. 20

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54 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Forecasting Environmental Change Forecasting environmental change is a process of extending the trends, develop- ments, dilemmas, and events that the organization is monitoring. Further, fore- casting looks at how hidden currents in the present signal possible changes in direction for organizations and societies. Thus, the primary goal of forecasting is to identify the full range of possibilities. 21 Therefore, the forecasting function attempts to answer the question, “If these trends continue, or if issues accelerate beyond their present rate, or if this event occurs, what will the issues and trends 'look like' in the future?”

Three processes are involved in the forecasting function:

1. Extending the issues (trends, developments, dilemmas, or occurrences of an event).

2. Identifying the interrelationships between the issues and environmental categories.

3. Developing alternative projections.

Assessing Environmental Change Information concerning the environment, though abundant, is seldom obvi- ous in its implications. Strategic managers must interpret the data they receive. After all, facts do not speak for themselves; one has to make sense of the facts, not just get them straight. 22 Assessing environmental change is a process that is largely non-quantifi able and therefore judgmental. The assessment process includes evaluation of the signifi cance of the extended (forecasted) issue on the organization; identifi cation of the issues that must be considered in the internal analysis; development of the vision and mission; and formulation of the strategic plan. However, even when exposed to identical issues, different managers may interpret their meaning quite differently. Interpretations are a result of a variety of factors, including perceptions, values, past experiences, and context.

Strategic decisions are made in the context of changing fi nancial, social, political, technical, and environmental forces – understanding the context in which an organization operates is, therefore, fundamental. Understanding context is called “ sensemaking ,” a term coined by organizational psycholo- gist Karl Weick. 23 Strategic leaders who have a sense of context know how to quickly capture the complexities of their environment and explain them to others in simple terms. This explanation helps to ensure that everyone is working from the same map, which makes it far easier to discuss and plan for the journey. 24

Sensemaking is a dynamic challenge, however, as Perspective 2–4 illustrates. PricewaterhouseCooper 's annual Medical Cost Trend: Behind the Numbers 2013 provides data that individual health care organizations will have to make “sense” of for their individual situation.

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55CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

PERSPECTIVE 2–4

A New Normal for Medical Costs?

Health care spending in the United States

has slowed over the past three years. Despite

expectations that costs would resume previ-

ous high growth rates in 2012, they did not.

PricewaterhouseCooper (PwC) Health Research

Institute 's Medical Cost Trend: Behind the Numbers

2013 report projected medical costs to grow at

a historically low rate of 7.5 percent in 2013.

Previous history carried forward would indicate

that the slowdown is simply a dip refl ecting the

current economic situation and that medical

cost growth will return to “normal” – a much

higher infl ation rate than that of GDP as the

economy recovers.

There may be more to the slower growth rate

of medical costs than the economy; however,

behaviors are beginning to change: employ-

ers are pushing wellness programs and trying

to keep their health insurance expenses down

with higher out-of-pocket costs for employ-

ees; health care providers and drug manufac-

turers are embracing “value”; and patients are

becoming more cost conscious and beginning

to “shop” for medical care.

The focus on medical cost containment is con-

tinuing, aided by the sluggish economy, reforms

in the health care industry, and eff orts by employ-

ers to keep costs down. Four factors will defl ate

the medical cost trend. (1) Market pressures on

medical supply and equipment costs will reduce

prices. Supplies can amount to 40 percent of the

cost of some procedures; “physician preferences”

will be less of an infl uencer as practices become

part of group purchasing plans where negoti-

ated lower prices lead to fewer choices. (2) New

methods of delivering primary care are becoming

more accepted. Alternatives to the traditional

offi ce visit include workplace and retail health

clinics, telemedicine, and mobile health tools. (3)

Comparative cost information is becoming more

widely available. Purchasers – including employ-

ers and consumers – are shopping for lower

cost alternatives. (4) Cost-saving generics are on

the rise. Consumers have greater awareness and

preference for generics driven by cost savings.

Both 2011 and 2012 set records for the number

of drugs going off patent; therefore, 2012 and

2013 set records for the number of generics – now

up to 80 percent of all prescriptions in the United

States.

Two factors will infl ate medical costs: (1) As

more jobs are added in the economy, those

newly hired workers will likely tap into their new

health care benefi ts, plus an uptick will occur in

utilization by those who have postponed medi-

cal treatment while the economy has been in

recession. (2) New technologies such as robotic

surgery and positron emission tomography

(PET) services have grown; although more com-

fortable for patients, they are more expensive.

During 2010, 36 percent of hospitals performed

robotic surgery.

The Medical Cost Trend: Behind the Numbers

2013 report incorporated a survey that found:

● More than half (57 percent) of employers are

considering increasing employee contribu-

tions to health plans.

● Half of employers are considering increasing

cost sharing through plan design, such as

higher deductibles. The average emergency

room copay is now $125 or more.

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56 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

The assessment process is not an exact science, and sound human judgment and creativity may be bottom-line techniques for sensemaking – a process without much structure. The fundamental challenge is to make sense out of vague, ambig- uous, and unconnected data. Strategic leaders have to infuse meaning into data; they have to make the connections among discordant data such that signals of future events are created. Sensemaking involves acts of perception and intuition. It requires the capacity to suspend beliefs, preconceptions, and judgments that may inhibit connections being made among ambiguous and disconnected data. 25

Environmental Analysis Tools and Techniques

Several different strategic thinking frameworks and techniques may be used to examine the general and health care environments. These frameworks, which are informal and generally not overly sophisticated, have been variously described as “judgmental,” “speculative,” or “conjectural.” 26 Indeed, environmental analysis is largely an individual effort and is directed to person-specifi c interests. Further, environmental analysis usually is not limited to just one of the environmental analysis tools and techniques. The remainder of this chapter will discuss envi- ronmental analysis frameworks that identify issues in the general and health care

● More than half of employers are considering

raising employee prescription drug plan costs.

● Average enrollment in high deductible

plans coupled with a Health Reimbursement

Account have increased to 43.2 percent in

2012 from 34.2 percent in 2010.

● Nearly three-quarters (72 percent) of

employers off er wellness programs, and half

say they are considering expanding those

programs next year.

Forced to do more with less, health care pro-

viders and consumers have begun to embrace

new strategies and habits that have the potential

to be long lasting. Hospitals are adopting use

of information technology (IT) to have greater

access to information and using analytics to

make more cost-eff ective decisions with the

information gathered. In addition, they are devel-

oping new relationships with physicians to pres-

sure suppliers for lower prices and because more

physicians are “managed” by hospitals, restricting

supply choice allows for better contracted prices

for those supplies. Employers and insurers are

encouraging comparison shopping by patients,

coordinated care that pays for better outcomes,

and promotion of healthier lifestyles. As con-

sumers are beginning to understand the high

costs (they have seen copays and deductibles

increase), they are open to alternatives; we seem

to be entering a “new normal” for health care.

Source: Health Research Institute, Medical Cost Trend: Behind the

Numbers 2013 , report by PricewaterhouseCoopers (May, 2012),

pp. 1–22.

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57CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

environments. An approach and techniques for more specifi c market segmenta- tion and competitive analysis will be discussed in Chapter 3.

Simple Issue Identifi cation and Extrapolation Issue identifi cation and extrapolation is a matter of identifying issues and then, from the existing data, anticipating the importance of the issue and likelihood that it will remain an issue. Perhaps because of its relative simplicity, issue iden- tifi cation and extrapolation is a widely practiced analysis method. Unfortunately, environmental issues are rarely presented as a neat set of quantifi able data; rather, environmental issues are ill-structured and conjectural. Thus, in many cases, issue identifi cation and extrapolation in environmental analysis is a mat- ter of reaching consensus on the existence of an issue and speculating on the likelihood of its continuance.

As illustrated in Exhibit 2–4 , the issue identifi cation and extrapolation pro- cess for a nursing home includes the identifi cation of issues by environmental category and the determination of its probable impact on the organization. Additionally, managers may assess the likelihood that the trend, development, or dilemma will continue or that the event will occur, and then identify the sources for additional information.

These issues may then be plotted on the chart shown in Exhibit 2–5 . The assumption is that the issues to the right of the curved line in the exhibit have a signifi cant impact (high impact) on the organization and are likely to continue or occur (high probability) and should be addressed in the strategic plan.

The formats illustrated in Exhibits 2–4 and 2–5 are useful for organizing envi- ronmental data and providing a starting point for speculating on the direction and rate of change for identifi ed trends. However, trend extrapolation of envi- ronmental issues requires extensive familiarity with the external environment (the issues) and a great deal of sound judgment.

EXHIBIT 2–4 Issue Identifi cation and Evaluation by a Nursing Home

Trend/Issue Evidence

Impact on Our

Organization

(1–10)

Probability of

Trend Continuing

(1–10)

Aging population 1 in 5 Americans will be at

least 65 by 2030

9 9

Wealthier elderly Income of those 60+ has increased 10 percent faster

than any other group

7 6

Local competition Over past 5 years, number of

nursing homes in the service

area has increased from

5 to 7

7 9

10 = High impact or probability

1 = Low impact or probability

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58 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Solicitation of Expert Opinion Expert opinion is often used to identify, monitor, forecast, and assess environ- mental trends. Experts play a key role in shaping and extending the thinking of leaders. Health care leaders can use these opinions to stimulate their strategic thinking and begin developing human resources strategies. To further focus leaders' thinking and generate additional perspectives concerning the issues in the external environment, there are a number of more formal expert-based environmental analysis techniques. These strategic thinking frameworks help to solicit and synthesize the opinions and best judgments of experts within various fi elds.

The Delphi Method The Delphi method is a popular, practical, and useful approach for analyzing environmental data. The Delphi method may be used to identify and study current and emerging trends within each environmental cat- egory (technological, social/demographic, economic, and so on). More specifi cally, the Delphi method is the development, evaluation, and synthesis of individual points of view through the systematic solicitation and collation of individual judg- ments on a particular topic. In the fi rst round, individuals are asked their opin- ions on the selected topic. Opinions are summarized and then sent back to the

Low Impact Low Probability

Impact on the

Organization

Critical issues to the right of the line should be addressed in the strategic plan

Low High 015

Low Impact High Probability

High Impact Low Probability

High Impact High Probability

Wealthier Elderly

Local Competition

Aging Population

High

Critical issues to the right of the line should be addressed in the strategic plan

Probability of Trend Continuing

EXHIBIT 2–5 Environmental Trends/Issues Plot

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59CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

participating individuals for the development of new judgments concerning the topic. After several rounds of solicitation and summary, a synthesis of opinion is formulated. 27

The traditional Delphi method has undergone a great deal of change in the context of environmental analysis. The salient features of the revised Delphi method are to:

● identify recognized experts in the fi eld of interest;

● seek their cooperation and send them a summary paper (based on a lit- erature search); and

● conduct personal interviews with each expert based on a structured questionnaire. 28

In contrast to traditional Delphi methods, there is no further feedback or repeated rounds of questioning. The major advantage is that it is easier to recruit recognized experts because they do not need to commit as much of their time.

The Delphi method is particularly helpful when health care managers want to understand a specifi c environmental issue. For example, a Delphi study was designed to defi ne the role and responsibilities of sports medicine specialists in the United Kingdom. A mail questionnaire was sent to a random sample of 300 members of the British Association of Sport and Exercise Medicine. The original questionnaire contained 300 attributes and allowed participants to modify their responses based on feedback from other participants. The study was recognized as the fi rst systematic attempt to defi ne the role and responsibilities of the sports medicine specialist and concluded that sports medicine was an evolving spe- cialty in the United Kingdom. 29 More recently, methods and experts from other disciplines have been applied to health care issues such as the forecasting of infectious diseases.

Nominal Group Technique, Brainstorming, and Focus Groups The nominal group technique (NGT), brainstorming, and focus groups are interactive group problem identifi cation and solving techniques. In the nominal group tech- nique , a group is convened to address an issue, such as the impact of consoli- dation within the health care industry or the impact of an aging population on hospital facilities. Each individual independently generates a written list of ideas surrounding the issue. Following the idea-generation period, group members take turns reporting one idea at a time to the group. Typically, each new idea is recorded on a large fl ip chart for everyone to consider. Members are encouraged to build on the ideas of others in the group. After all the ideas have been listed, the group discusses the ideas. After the discussion, members privately vote or rank the ideas. After voting, further discussion and group generation of ideas continue. Typically, additional voting continues until a reasonable consensus is reached. 30

A brainstorming group is convened for the purpose of understanding an issue, assessing the impact of an issue on the organization, or generating strate- gic alternatives. In this process, members present ideas and are allowed to clarify them with brief explanations. Each idea is recorded, but evaluation is generally

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60 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

not allowed. The intent of brainstorming is to generate fresh ideas or new ways of thinking. Members are encouraged to present any ideas that occur to them, even apparently risky or impossible ideas. Such a process often stimulates crea- tivity and sparks new approaches that are not as risky, crazy, or impossible as fi rst thought. 31

NGT and brainstorming could be used to understand and respond to the increasing competition for ambulatory surgery. The outpatient surgery center is a rapidly growing trend and hospitals are very concerned about the impact this growth could have on their bottom line. In 1980, for example, only 15 per- cent of all surgeries were performed on an ambulatory basis. Today, more than 75 percent are outpatient. Inpatient surgeries requiring a one-day or longer length of stay now constitute only about 18 to 20 percent of hospital surgery profi ts and the percentage is dropping each year. The most popular outpatient areas are gastroenterology, orthopedics, gynecology, ophthalmology, as well as podiatry, ENT, and general surgery. However, increasingly there are signs that angioplasty, peripheral vascular surgery, and low-risk coronary interventions such as pacemakers and cardiac defi brillators may be next.

These changes and the prospect of even greater changes offer an opportunity for hospital managers to employ brainstorming groups to plan for the future. Some of the major uncertainties that could be addressed by the groups include the PPACA. Brainstorming groups could provide serious insights into how will- ing physicians are to continue performing their procedures in hospitals and turn away from investments in outpatient facilities that could provide a 25 percent return on invested capital. Moreover, outpatient surgeries are easier for physi- cians to schedule without the aggravation of sharing operating rooms with inpa- tient and emergency services. Brainstorming groups might also be used to project the future direction of hospital reimbursement. Although both of these factors represent major uncertainties, informed groups could be very useful in preparing for the increasingly competitive health care environment. 32

Similar to the process of brainstorming, focus groups bring together 10 to 15 key individuals to develop, evaluate, and reach conclusions regarding environ- mental issues. Focus groups provide an opportunity for management to discuss particularly important organizational issues with qualifi ed individuals. Hospitals and large group practices have used focus groups of patients to better under- stand the perceived strengths and weaknesses of the organization from the patient 's view. For example, Johns Hopkins was considering the establishment of an integrated delivery system under one umbrella name. Focus groups of physicians, present and past patients, non-patients, and others convinced them to change plans. Focus groups can provide new insights for understanding issues and suggest fresh alternatives for their resolution.

Dialectic Inquiry Dialectic inquiry is a “point and counterpoint” process of argumentation. The 19th-century German philosopher Hegel suggested that the surest path to truth was the use of a dialectic process – an intellectual exchange in which a thesis is pitted against an antithesis. According to this principle, truth emerges from the search for synthesis of apparently contradictory views. 33

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61CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

More specifi cally, in environmental analysis, dialectic inquiry is the develop- ment, evaluation, and synthesis of confl icting points of view (environmental issues) through separate formulation and refi nement of each point of view. 34 For instance, one group may argue that health care costs will be declining between 2014 and 2020 (thesis) because of the Patient Protection and the Accountable Care Act. Another group may present a case that the trend toward rising health care costs will continue (antithesis) because of hospital failures, the high cost of new technology, shortage of primary care providers, and so on. Debating this issue will unearth the major factors infl uencing health care costs and the impli- cations for the future.

Any health care provider can utilize this technique by assigning groups to debate specifi c external issues. The groups make presentations and debate con- fl icting points of view concerning the environment. After the debate, the groups attempt to form a synthesis of ideas concerning the likely future. 35

Stakeholder Analysis Stakeholder analysis is based on the belief that there is a reciprocal relation- ship between an organization and certain other organizations, groups, and indi- viduals. They are referred to as stakeholders: that is, organizations, groups, and individuals that have an interest or “stake” in the success of the organization. Examples of possible health care stakeholders, shown as a “stakeholder map,” are presented in Exhibit 2–6 .

Stakeholders may be categorized as internal, interface, and external. Internal stakeholders are those who operate primarily within the bounds of the organization, such as managers and other employees. Interface stake- holders are those who function both internally and externally, such as the medical staff and the corporate offi cers of the parent company. External stakeholders operate outside the organization and include such entities as suppliers, third-party payers, competitors, regulatory agencies, the media, the local community, and so on. 36 Such stakeholders have been referred to as the “organization ecosystem”– organizations that affect and are affected by the creation and delivery of the organization 's product or service. Part of stakeholder analysis is to systematically identify the organizations with which their future is most closely intertwined and determine the dependencies that are most critical. 37

Some of these stakeholders are almost always powerful or infl uential; oth- ers are infl uential regarding only certain issues; still others have little infl uence or power. If the stakeholders can be identifi ed and evaluated, then the “forces” affecting the organization may be specifi ed. The needs and wants of these con- stituencies may dramatically affect the strategy of an organization. 38

Typically, managers tend to focus attention on known, salient, or powerful stakeholders to help protect existing competitive advantages. However, there is growing evidence that “fringe” stakeholders are important as well – particularly for developing new ways of thinking. Stuart Hart and Sanjay Sharma suggest that “the knowledge needed to generate competitive imagination and to manage disruptive change increasingly lies outside the organization, at the periphery” of the organization 's established stakeholder network. 39 Therefore, strategic

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62 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

thinkers must be open to fringe ideas and non-traditional thinking developed by fringe players. At fi rst, these stakeholders may appear to be poor, weak, isolated, non-legitimate, or radical. 40 In reality, they may be strong purveyors of change.

Scenario Writing and Future Studies Many businesses regularly use scenarios. The popularity of scenario analysis is due in large part to the inability of other, more quantitative forecasting methods to predict and incorporate major shifts in the environment and provide a con- text for strategic thinking. Scenarios avoid the need for single-point forecasts by allowing users to explore several alternative futures. 41 Scenario analysis is an alternative to conventional forecasting that is better suited to an environment with numerous uncertainties or imponderables – where there is no map.

Specialty physician referrals

Nonspecialty physician referrals

Competing physicians

Third-party payors

Self-insured employers

Local paying patients

Organizations managing

care

Nonlocal patients

Professional associations

Federal, state, and local regulators

Federal Medicare

State Medicaid

Indigent patients

Professional employees

Practice administrative

services

Multispecialty group medical

practice

Nonlocal physicians

Hospital

Governing board

EXHIBIT 2–6 A Stakeholder Map for a Large Multispecialty Group Practice

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63CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

A scenario is a coherent story about the future, using the world of today as a starting point. Based on data accumulated in the scanning and monitoring processes, a scenario or narrative that describes an assumed future is developed. The objective of scenarios and future studies is to describe a point of time in the future as a sequence of time-frames or periods of time. Scenario writing often requires generous assumptions. Few guidelines indicate what to include in the scenario. In most cases several plausible scenarios should be written. It is an all-too-common mistake to envision only one scenario as the “true picture of the future.” 42 Most authorities advocate the development of multiple scenarios. However, to avoid decision makers focusing only on the “most likely” or “most probable” scenario, each scenario should be given a distinctive theme name, such that they appear equally likely.

Multiple scenarios allow the future to be represented by different cause–effect relationships, different key events and their consequences, different variables, and different assumptions. The key question is: “If this environmental event hap- pens (or does not happen), what will be the effect on the organization?” The use of multiple scenarios was particularly helpful as organizations considered the probable impact of health care reform legislation (PPACA) on their organizations. Perspective 2–5 presents a brief summary of four scenarios or alternative futures for primary health care between now and 2025. The scenarios were developed by the Institute for the Future to provide a description of critical factors that will infl uence health and health care in the 21st century.

PERSPECTIVE 2–5

Primary Care 2025: A Scenario Exploration

With signifi cant uncertainty facing health care

in 2012, the Institute for Alternative Futures

(IAF) used its “aspirational futures” technique

to develop four primary care scenarios. The

technique develops scenarios in three zones: a

zone of conventional expectation (the expected

future by extrapolating known trends), a zone

of growing desperation (a challenging future

based on plausible issues to be faced), and a

zone of high aspiration (visionary strategies

pursued by a critical mass of stakeholders that

achieve surprising success). An advisory com-

mittee of seven experienced health care leaders

from provider organizations, health profession-

als, policy makers, and academics was recruited

to inform the development of the scenarios.

Next a workshop was held with 26 knowledge-

able participants. Then 56 leading experts in the

health care fi eld were interviewed, followed by

ten focus groups held around the country. The

collaboration of all these innovative thinkers led

to the development of the following scenarios

for Primary Care 2025.

SCENARIO 1: MANY NEEDS,

MANY MODELS

Primary care improves as the payment system

changes to the patient-centered medical home

(PCMH) model and the use of electronic medical

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64 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

records (EMRs) improves the quality of care.

Reductions in payment rates for health care

providers force providers to reduce costs, accom-

plished in part by focusing on prevention, shift-

ing/sharing tasks with non-physician providers,

and increasing patient contact by phone or

online. Based on the Patient Protection and

Aff ordable Care Act (ACA) of 2010, many employ-

ers quit providing health insurance benefi ts and

employees move to health insurance exchanges

mandated by ACA, although the access and

aff ordability vary widely from state to state. A

signifi cant portion of Americans purchase the

mandated individual coverage consisting of

high-deductible, catastrophic care plans requir-

ing them to pay for primary care out-of-pocket.

The primary care physician shortage increases the

use of teams including nurse practitioners, social

workers, community health workers, and phar-

macists who increasingly use phones and email

to interact with patients; patients use support

technologies similar to IBM 's “Dr. Watson” as

digital health agents to guide their own healthy

behaviors in a social, fun way. Payment is through

integrated systems including HMOs and ACOs

(40 percent), semi-integrated systems such as

community health centers and others using the

PCMH model (30 percent), and fee-for-service –

from “concierge services” at one end to minute

clinics at the other (30 percent). Primary care

improves in the aggregate; however, disparities

continue among some poor, minority, and rural

populations. Health care accounts for 19 percent

of GDP in 2025.

SCENARIO 2: LOST DECADE,

LOST HEALTH

Recurring economic challenges prompt signifi -

cant cuts in federal health care spending. The

global debt crisis pushes the world into an endur-

ing recession; health care is especially hard hit.

When payments on the national debt increased

to the point of being the same as Medicare costs,

international creditors raised interest rates and

the federal government instituted a 10 percent

across the board spending cut. Health insurance

exchanges were successful in only a few states;

they were either underfunded or unable to

provide aff ordable, high quality care. Moreover,

businesses opted out of providing insurance for

employees. Because of the unaff ordability of care

for many, Congress enacted a series of postpone-

ments that eventually acted as a de facto repeal

of the ACA.

Estimates of medical shortages did not take

into consideration the number of baby boomer

physicians who would retire early because of

deep cuts in reimbursements for Medicare and

Medicaid. The aging boomer cohort stressed the

system, resulting in many health care providers

operating beyond the scope of their licenses,

leading to a black market for care.

In 2025 most primary care is provided in one

of three settings. (1) Premium fee-for-service

(15 percent): “concierge” services off ering more

sophisticated services. (2) Low-cost fee-for-

service (35 percent): high-deductible cata-

strophic care health plans requiring individuals

and families to pay out-of-pocket for most pri-

mary care – retail clinics in pharmacies and big

box stores grow to fi ll the gap. (3) Integrated

(30 percent) and semi-integrated systems (20

percent): care takes place in integrated systems

using single payments to cover all care (Kaiser

Permanente-type) with higher costs but better

quality care or in semi-integrated settings

that have a mix of fee-for-service and pay-for-

performance as off ered in many group prac-

tices and community health centers.

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65CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

SCENARIO 3: PRIMARY CARE THAT

WORKS FOR ALL

US policy makers actively pursue the “triple

aim” in health care initiatives: enhancing patient

care, reducing per capita health care costs, and

improving health of the population. Provider

teams receive a single capitated payment based

on population data that considers relative health

care risks of the patient, causing the provider

to optimize health outcomes while reducing

costs. With the development of health insur-

ance exchanges, employers no longer provide

health insurance as an employee benefi t but do

off er support systems and rewards for healthy

behaviors that reduce medical care demands.

Community care health homes (CCHHs) provide

primary care for 85 percent of the population;

fee-for-service/concierge service for 10 percent;

and 5 percent of the population remains unin-

sured and seeks care at emergency rooms and

community health centers.

CCHHs deliver primary care and work at cre-

ating the social and economic foundations for a

healthier community by improving the primary

care delivered and the use of electronic medical

records that collect health and lifestyle data to

provide a patient 's health status and prospects.

The team interacts via phone, email, and virtual

reality as well as health advocate avatars (digi-

tal health coaches). Providers delivering better

outcomes at lower costs keep the savings, an

approach that proves to reorient primary care

toward value and moving upstream to aff ect the

social determinants of health.

SCENARIO 4: I AM MY OWN

MEDICAL HOME

Advanced medical technologies allow individu-

als using self-care to take over many functions

of primary care. New smartphone “apps” moni-

tor diet, physical activity, sleep, and collect the

data in personal health records. New moni-

toring devices record blood pressure, blood

chemistry, blood fl ow, and alert the individual

to changes in health; new technology pro-

vides lab tests at home or sends data to a lab.

Consumers have much information available to

them, including advice tailored to their health

care needs.

A signifi cant segment of the population

(40 percent) relies on consumer-directed health

plans and uses advanced self-care tools. Data

is collected, aggregated, and used for track-

ing population health and producing rapid

comparative eff ectiveness and safety studies.

A second signifi cant segment (40 percent)

wants more traditional providers and personal

relationships as in integrated health care sys-

tems or ACOs. They can aff ord more costly

insurance premiums; however, their buying

decisions are based on transparency of avail-

able cost and quality data on nearly every pro-

vider. Concierge practices (10 percent) provide

high-value services such as physiome models

and simulations for predicting health. These

physicians have to be charismatic, high energy,

and well recognized as excellent to maintain

the patients in the “panel” that they serve. The

remaining 10 percent of the population are

near poor individuals removed from Medicaid

or individuals who choose to avoid insurance

and have the income to pay for care (which they

choose wisely). Because of the self-care tools

as well as the health care avatars and coaches,

much less in-person interaction with providers

occurs and the demand for primary care physi-

cians diminishes.

Source: Primary Care 2025: A Scenario Exploration (Alexandria,

VA: Institute for Alternative Futures, January, 2012, 43 pages).

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66 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

EXHIBIT 2–7 Primary Focus, Advantages, and Disadvantages of Environmental Techniques

Technique Primary Focus Advantage Disadvantage

Simple Trend

Identifi cation and

Extrapolation

Scanning

Monitoring

Forecasting

Assessing

● Simple

● Logical

● Easy to communicate

● Need a good deal of data

in order to extend trend

● Limited to existing trends

● May not foster creative

thinking

Delphi Method Scanning

Monitoring

Forecasting

Assessing

● Use of fi eld experts

● Avoids intimidation

problems

● Eliminates management 's

biases

● Members are physically

dispersed

● No direct interaction of

participants

● May take a long time to

complete

Nominal Group

Technique

Scanning

Monitoring

Forecasting

Assessing

● Everyone has equal

status and power

● Wide participation

● Ensures representation

● Eliminates management 's

biases

● Structure may limit

creativity

● Time consuming

Brainstorming Forecasting

Assessing

● Fosters creativity

● Develops many ideas,

alternatives

● Encourages

communication

● No process for making

decisions

● Sometimes gets off track

Focus Groups

Forecasting

Assessing

● Uses experts

● Management/expert

interaction

● New viewpoints

● Finding experts

● No specifi c structure for

reaching conclusions

Selecting the Strategic Thinking Framework The purpose of analyzing the general and health care environments is to identify and understand the signifi cant shifts taking place in the external environment. Exhibit 2–7 summarizes the primary focus, advantages, and disadvantages of each strategic thinking framework.

The approach selected for evaluating the general and health care environ- ments will depend on such factors as the size of the organization, the diversity of the products and services, and the complexity and size of the markets (service areas). Organizations that are relatively small, do not have a great deal of diver- sity, and have well-defi ned service areas may opt for a simple strategic thinking framework that may be carried out in-house, such as trend identifi cation and extrapolation, in-house nominal group technique or brainstorming, or stake- holder analysis. Such organizations may include independent hospitals, HMOs, rural and community hospitals, large group practices, long-term care facilities, hospices, and county public health departments.

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67CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

Technique Primary Focus Advantage Disadvantage

Dialectic Inquiry

Forecasting

Assessing

● Surfaces many

subissues and factors

● Conclusions are reached

on issues

● Based on analysis

● Does not provide a set of

procedures for deciding

what is important

● Considers only a single

issue at a time

● Time consuming

Stakeholder

Analysis

Scanning

Monitoring

● Considers major

independent groups and

individuals

● Ensures major needs and

wants of outside organi-

zations are taken into

account

● Emerging issues generated

by other organizations

may not be considered

● Does not consider the

broader issues of the

general environment

Scenario Writing

Forecasting

Assessing

● Portrays alternative futures

● Considers interrelated

external variables

● Gives a complete picture

of the future

● Requires generous

assumptions

● Always a question as to

what to include

● Diffi cult to write

Health care organizations that are large, have diverse products and services, and have ill-defi ned or extensive service areas may want to use a strategic think- ing framework that draws on the knowledge of a wide range of experts. As a result, these organizations are more likely to set up Delphi panels and outside nominal groups or brainstorming sessions. In addition, these organizations may have the resources to conduct dialectics concerning environmental issues and engage in scenario writing. Such approaches are usually more time consuming, fairly expensive, and require extensive coordination. Organizations using these approaches may include national and regional for-profi t health care chains, regional health care systems, large federations and alliances, and state public health departments. Ultimately, the strategic thinking framework selected for environmental analysis may depend primarily on the style and preferences of

management. If used properly, any of the frameworks can be a powerful tool for identifying, monitoring, forecasting, and assessing issues in the general and health care environments.

Managing Strategic Momentum – Validating the Strategic Assumptions

The strategic plan is based in part on an analysis of the external environ- ment. Initially this analysis provides the basic beliefs or assumptions that

EXHIBIT 2–7 (Continued)

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68 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

EXHIBIT 2–8 Strategic Thinking Questions for Validation of the Strategic Assumptions

1. Has the organization 's performance been adversely aff ected by unexpected or new

trends or issues in the general environment?

2. Has the organization 's performance been adversely aff ected by unexpected or new

trends or issues in the health care environment?

3. Have new opportunities emerged as a result of new trends, issues, or events in the exter-

nal environment?

4. Is the strategy acceptable to the major stakeholders?

5. Are there new technological developments that will aff ect the organization?

6. Have there been social or demographic changes that aff ect the market or strategy?

Changes in ethnic mix? Language barriers? Family structure?

7. Has the legislative/political environment changed?

8. Are there new local, state, or federal regulations or laws being introduced, debated, or

passed that will aff ect operations or performance?

9. Are there new economic issues?

10. Have new competitors outside the industry considered entering or actually entered into

health-related areas?

11. Is the strategy subject to government response?

12. Is the strategy in conformance with the society 's moral and ethical codes of conduct?

management holds concerning various issues in the external environment. Once strategic management is adopted as the operating philosophy of managing, strategic thinking, strategic planning, and managing the strate- gic momentum require frequent validation of the strategic assumptions to determine whether issues in the external environment have changed and to what extent. Continued strategic thinking is vital to maintaining strategic momentum.

The strategic thinking map presented in Exhibit 2–8 provides a series of ques- tions designed to detect signals of new perspectives regarding these assumptions. The questions examine management 's understanding of the external environment and the effectiveness of the strategy. The board of directors, strategic managers, or others may use these questions as a beginning point to confi rm the assump- tions underlying the strategy. Such strategic thinking questions may indicate the emergence of new external opportunities or threats that will affect the organi- zation and may suggest areas where additional information will be required in future planning efforts. Current, accurate information may mean survival for many health care organizations. Questions concerning the external environ- ment may reveal that a group practice knows far too little about the views of its major constituents (stakeholders) or the existence of new technologies or social trends. A validation (or invalidation) of the strategic assumptions reinvigorates strategic thinking and provides a basis for investigating whether to change the strategy.

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69CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

Lessons for Health Care Managers

Health care managers must be able to understand and analyze the general and health care industry environments. To be successful, organizations must be effec- tively positioned within their environment. Organizations involved in making capital allocations, experiencing unexpected environmental changes or surprises from different kinds of external forces, facing increasing competition, becoming more marketing oriented, or experiencing dissatisfaction with their present plan- ning results should engage in environmental analysis.

The goal of environmental analysis is to classify and organize the general and health care industry issues and changes generated outside the organization. In the process, the organization attempts to detect and analyze current, emerging, and likely future issues. The gathered information is used for internal analysis; development of the vision and mission; and formulation of the strategy for the organization. In addition, the process should foster strategic thinking throughout the organization.

Although the benefi ts of environmental analysis are clear, there are several limitations. Environmental analysis cannot foretell the future; nor can managers hope to detect every change. Moreover, the information needed may be impos- sible to obtain or diffi cult to interpret, or the organization may not be able to respond quickly enough. The most signifi cant limitation may be managers' pre- conceived beliefs about the environment.

The external environment includes organizations and individuals in the gen- eral environment (government institutions and agencies, business fi rms, educa- tional institutions, research organizations and foundations, and individuals and consumers), and organizations and individuals in the health care environment (organizations that regulate, primary providers, secondary providers, organiza- tions that represent providers, and individuals and patients).

Organizations and individuals in both the general and health care environ- ments generate changes that may be important to health care organizations. Typically, such change is classifi ed as legislative/political, economic, social/ demographic, technological, or competitive. Such a classifi cation system aids in aggregating information concerning the issues and in determining their impact. Sources for environmental issues are found both inside and outside the organiza- tion and are direct as well as indirect.

The steps in environmental analysis include scanning to identify signals of environmental change, monitoring identifi ed issues, forecasting the future direc- tion of issues, and assessing organizational implications. Scanning is the process of viewing and organizing external information in an attempt to detect relevant issues that will affect the organization. Monitoring is the process of searching for additional information to confi rm or disprove the issue (trend, development, dilemma, or likelihood of the occurrence of an event). Forecasting is the process of extending issues, identifying their interrelationships, and developing alterna- tive projections. Finally, assessing is the process of evaluating the signifi cance of the issues. The information garnered from external environmental analysis infl uences internal analysis, the development of the vision and mission, and formulation of the strategy for the organization.

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70 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

There are several strategic thinking frameworks to conduct the scanning, monitoring, forecasting, and assessing processes. These methods include simple issue identifi cation and extension, solicitation of expert opinion, dialectic inquiry, stakeholder analysis, and scenario writing. Finally, as part of managing the strate- gic momentum, evaluation of the strategic assumptions (external issues) should periodically take place. The next chapter focuses on service area competitive analysis.

Health Care Manager ’s Bookshelf

Peter Schwartz, The Art of the Long View: Planning for the Future in An Uncertain World (New York: Currency Doubleday, 1991)

Peter Schwartz was working as a futurist

at the Stanford Research Institute in 1975

when he met Pierre Wack of Royal/Dutch

Shell. Later, in 1982, he replaced Wack as

head of Shell Group Planning. This position

provided a unique opportunity to perfect the

scenario-building skills he had practiced for

years. In his book, The Art of the Long View:

Planning for the Future in An Uncertain World ,

Schwartz presents the fundamental nature

of scenarios, how to build them, and how to

use them. 1

One way to avoid becoming a victim

of surprise is to create diff erent stories of

equally likely futures. These stories are called

scenarios, an important objective of which is

to aid strategists in “creating a fi t” between

their organization and its environment. 2

Scenarios are not about predicting the future

but are about perceiving futures in the pre-

sent (p. 36). They are “vehicles for helping

people learn.” 3 In a sense, scenario planning

is about “freeing the mind” of the health care

strategist to admit that tomorrow may not be

like today. 4

Schwartz extended his work in The Art

of the Long View and introduced the con-

cept of inevitable surprises . Even though

we do not like surprises, they are inevita-

ble because they have already started

taking place through predetermined events –

forces we can anticipate with certainty. 5

If we can identify these events, why will there

be surprises? The answer is simple – while the

events are predetermined, the timing, results,

and consequences are not (p. 6).

The Art of the Long View provides plan-

ners with a uniform process for developing

scenarios. Schwartz suggests an eight-step

process: step 1 – identify a focal decision; step

2 – list key factors infl uencing the success or

failure of the decision; step 3 – list the driving

forces in the environment that infl uence the

key factors; step 4 – rank the key factors and

driving forces in terms of their importance

and the uncertainty associated with each;

step 5 – select the scenario logic, involving

determining the dimensions along which the

eventual scenarios will diff er; step 6 – fl esh

out the scenarios; step 7 – return to the focal

decision and rehearse implications for the

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71CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT

Assessing

Brainstorming

Delphi Method

Dialectic Inquiry

Expert Opinion

External Environmental Analysis

Focus Groups

Forecasting

General Environment

Health Care Environment

Issue Identifi cation and Extrapolation

Monitoring

Nominal Group Technique (NGT)

Primary Provider

Scanning

Scenarios

Secondary Provider

Sensemaking

Stakeholder Analysis

Strategic Issues

Questions for Class Discussion

1. What types of changes are likely to occur in the health care environment in the next several years?

2. Why is environmental analysis important for an organization?

3. Describe the “setting” for health care management. Is the setting too complex or changing too rapidly to accurately predict future conditions?

future; and step 8 – select leading indicators

and signposts and determine the indicators

necessary to monitor each scenario in an

ongoing manner.

One writer stated that The Art of the

Long View is “destined” to become a mile-

stone in long-range planning and strategic

thinking. Understanding the lessons in this

book should provide decision makers with

the “ability to act confi dently” because of

the knowledge they have of where the

uncertainties of the future in health care

will lie. 6 Surprises will never be eliminated.

However, futurists such as Schwartz have

provided strategic thinkers with the tools

to at least minimize the ill eff ects of those

surprises that are predictable, even if they

are inevitable.

REFERENCES

1. Peter Schwartz, The Art of the Long View:

Planning for the Future in An Uncertain World

(New York: Currency Doubleday, 1991).

2. Edward Desmarais, “The Art of Scenario

Planning: A Review of Two Books,” Journal of

Business and Economic Studies 6, no. 1 (2000),

pp. 81–85.

3. “The Art of the Long View,” The Futurist 26, no. 1

(1992), p. 35.

4. “The Future is Tricky,” Economist 320, no. 7726

(1991), p. 10.

5. Peter Schwartz, Inevitable Surprises: Thinking

Ahead in a Time of Turbulence (New York:

Gotham Books, 2003).

6. James Wilk, “A Shimmering View of the Logic of

Unfolding Futures: Book Review,” Long Range

Planning 24, no. 6 (1991), pp. 110–121.

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72 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Notes

4. Most health care managers would answer “yes” to many of A. H. Mesch 's questions to determine whether an organization needs environmental analysis. Are there other questions that seem to indicate that health care organizations should be performing environmental analysis?

5. What are the specifi c goals of environmental analysis?

6. What are the limitations of environmental analysis? Given these limitations, is envi- ronmental analysis worth the effort required? Why?

7. What four processes are involved in environmental analysis? What are their subprocesses?

8. How does the scanning process create a “window” to the external environment? How does the window concept help in understanding organizations and the types of infor- mation they produce?

9. Why is the process of environmental analysis as important as the product?

10. Which of the environmental analysis strategic thinking frameworks are most useful? Why?

11. Using Exhibit 2–6 as an example, develop a “stakeholder map” for a health care organization in your metropolitan area or state. On this map show the important health care organizations and indicate what impact they may have on the industry.

12. Which of the scenarios in Perspective 2–5 do you think is most likely? Why? Based on today 's issues, develop your own scenario of health care in 2025.

13. What are an organization 's strategic assumptions? How may the strategic assumptions be evaluated as part of managing strategic momentum?

1. Kathleen M. Sutcliffe and Klaus Weber, “The High Cost

of Accurate Knowledge,” Harvard Business Review 81,

no. 5 (2003), p. 75.

2. Peter F. Drucker, Managing the Nonprofi t Organization:

Principles and Practices (New York: HarperCollins

Publishers, 1990), p. 9.

3. Joel A. Barker, Future Edge: Discovering the New

Paradigms of Success (New York: William Morrow,

1992), p. 28.

4. This partial list of issues in the health care industry results

from tracking the strategic issues in health care in the

professional and trade literature, government and foun-

dation reports, and numerous interviews with both pub-

lic and private health care professionals by the authors.

5. Charles R. Morris, “Why U.S. Health Care Costs Aren 't

Too High,” Harvard Business Review 85, no. 2 (February

2007), p. 52.

6. Ibid., p. 50.

7. Ibid.

8. Ibid., pp. 50, 52.

9. James M. Kouzes and Barry Z. Posner, The Leadership

Challenge: How to Keep Getting Extraordinary Things

Done in Organizations (San Francisco: Jossey-Bass

Publishers, 1995), pp. 47–48 and Ross Dawson, Living

Networks: Leading Your Company, Customers, and

Partners in the Hyper-Connected Economy (Upper

Saddle River, NJ: Prentice Hall/Financial Times, 2003),

see especially Chapter 9.

10. A. H. Mesch, “Developing an Effective Environmental

Assessment Function,” Managerial Planning 32 (1984),

pp. 17–22.

11. Paul Saffo, “Six Rules for Effective Forecasting,” Harvard

Business Review 85, no. 7/8 ( July/August 2007), p. 130.

12. Michael D. Watkins and Max H. Bazerman, “Predictable

Surprises: The Disasters You Should Have Seen Coming,”

Harvard Business Review 81, no. 3 (2003), pp. 72–80.

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73CHAPTER 2 UNDERSTANDING AND ANALYZING THE ENVIRONMENT

For a comprehensive assessment see Max H. Bazerman

and Michael D. Watkins, Predictable Surprises: The

Disasters You Should Have Seen Coming and How to

Prevent Them (Boston, MA: Harvard Business School

Press, 2004).

13. J. O 'Connell and J. W. Zimmerman, “Scanning the

International Environment,” California Management

Review 22 (1979), pp. 15–22 and Bradley J. Olson,

Satyanarayana Parayitam, and Yongjian Bao, “Strategic

Decision Making: The Effects of Cognitive Diversity,

Confl ict, and Trust on Decision Outcomes,” Journal of

Management 33, no. 2 (2007), pp. 196–222.

14. Barker, Future Edge , p. 86.

15. Edward De Bono, Serious Creativity: Using the Power

of Lateral Thinking to Create New Ideas (New York:

HarperBusiness, 1992), p. 17. See also Bradley L.

Kirkman, Benson Rosen, Paul E. Tesluk, and Christina B.

Gibson, “The Impact of Team Empowerment on Virtual

Team Performance: The Moderating Role of Face-to-

Face Interaction,” Academy of Management Journal 47,

no. 2 (2004), pp. 175–192.

16. Beaufort B. Longest Jr., Management Practices for the

Health Professional , 4th edn (Norwalk, CT: Appleton &

Lange, 1990), pp. 12–28.

17. Liam Fahey and V. K. Narayanan, Macroenvironmental

Analysis for Strategic Management (St. Paul: West

Publishing, 1986).

18. Klaus Kleinfeld, “Seeing is Treating,” Harvard Business

Review 85, no. 2 (February 2007), p. 47.

19. James B. Thomas and Reuben R. McDaniel Jr.,

“Interpreting Strategic Issues: Effects of Strategy and the

Information-Processing Structure of Top Management

Teams,” Academy of Management Journal 33, no. 2

(1990), p. 288. See also Peer C. Fiess and Edward J.

Zajac, “The Symbolic Management of Strategic Change:

Sensegiving via Framing and Decoupling,” Academy of

Management Journal 49, no. 6 (2006), pp. 1173–1193.

20. Thomas and McDaniel, “Interpreting Strategic Issues,”

pp. 289–290.

21. Saffo, “Six Rules for Effective Forecasting,” p. 124.

22. Sutcliffe and Weber, “The High Cost of Accurate

Knowledge,” p. 75.

23. Karl E. Weick, Sensemaking in Organizations (Thousand

Oaks, CA: Sage Publications, 1995); Deborah Ancona,

Thomas W. Malone, Wanda Orlikowski, and Peter M.

Senge, “In Praise of the Incomplete Leader,” Harvard

Business Review 85, no. 2 (February 2007), pp. 94–95.

24. Ibid., p. 95.

25. Fahey and Narayanan, Macroenvironmental Analysis ,

p. 39.

26. H. E. Klein and R. E. Linneman, “Environmental Assessment:

An International Study of Corporate Practice,” Journal of

Business Strategy 5 (1984), pp. 66–75. See also Jonathan

Parry, “Making Sense of Executive Sensemaking,” Journal

of Health Organization & Management 17, no. 4 (2003),

pp. 240–263 and Linda Rouleau, “Micro-Practices of

Strategic Sensemaking and Sensegiving: How Middle

Managers Interpret and Sell Change Every Day,” Journal

of Management Studies 42, no. 7 (2005), pp. 1413–1441.

27. James L. Webster, William E. Reif, and Jeffery S. Bracker,

“The Manager 's Guide to Strategic Planning Tools

and Techniques,” Planning Review 17, no. 6 (1989),

pp. 4–13; Pamela Tierney and Steven M. Farmer, “The

Pygmalion Process and Employee Creativity,” Journal

of Management 30, no. 3 (2004), pp. 413–432.

28. S. C. Jain, “Environmental Scanning in US Corporations,”

Long Range Planning 17 (1984), p. 125. See also Dovev

Lavie, “Capability Reconfi guration: An Analysis of

Incumbent Responses to Technological Change,” Academy

of Management Review 31, no. 1 (2006), pp. 153–174.

29. B. Thompson, D. MacAuley, O. McNally, and S. O 'Neill,

“Defi ning Sports Medicine Specialist in the United

Kingdom: A Delphi Study,” British Journal of Sports

Medicine 38, no. 2 (2004), pp. 14–18.

30. Craig S. Fleisher and Babette E. Bensoussan, Strategic

and Competitive Analysis: Methods and Techniques for

Analyzing Business Competition (Upper Saddle River, NJ:

Prentice Hall, 2003), p. 287; Lucy L. Gilson and Christina E.

Shalley, “A Little Creativity Goes A Long Way: An

Examination of Teams' Engagement in Creative Processes,”

Journal of Management 30, no. 4 (2004), pp. 453–470.

31. Fleisher and Bensoussan, op. cit. , p. 257.

32. Information for this example was adapted from

Richard Haugh, “Competition Keeps Getting Hotter for

Ambulatory Surgery,” Hospitals & Health Networks 80,

no. 10 (2006), pp. 68–72.

33. Barbara Karmel, Point and Counterpoint in

Organizational Behavior (Hinsdale, IL: Dryden Press,

1980), p. 11; W. Jack Duncan, Peter M. Ginter, and Linda E.

Swayne, Strategic Issues in Health Care Management

(Boston, MA: PWS-Kent Publishing, 1992), p. 6.

34. Webster, Reif, and Bracker, “The Manager 's Guide,” p. 13.

35. Ibid.

36. Myron D. Fottler, John D. Blair, Carlton J. Whitehead,

Michael D. Laus, and G. T. Savage, “Assessing Key

Stakeholders: Who Matters to Hospitals and Why?”

Hospital and Health Services Administration 34, no. 4

(1989), p. 527.

37. Marco Iansiti and Roy Levien, “Strategy as Ecology,”

Harvard Business Review 82, no. 3 (2004), pp. 68–78.

38. Fottler, Blair, Whitehead, Laus, and Savage, “Assessing

Key Stakeholders,” p. 532.

39. Stuart L. Hart and Sanjay Sharma, “Engaging Fringe

Stakeholders for Competitive Imagination,” The Academy

of Management Executive 18, no. 1 (2004), pp. 7–18.

40. Ibid.

41. Audrey Schriefer, “Getting the Most Out of Scenarios:

Advice from the Experts,” Planning Review 23, no. 5

(1995), pp. 33–35; J. Alberto Aragón-Correa and Sanjay

Sharma, “The Social Side of Creativity: A Static and

Dynamic Social Network Perspective,” Academy of

Management Review 28, no. 1 (2003), pp. 89–106; Mats

Lindgren and Hans Bandhold, Scenario Planning: The

Link between Future and Strategy (Houndsmills, UK:

Palgrave Macmillan, 2003).

42. Peter Schwartz, The Art of the Long View: Planning for

the Future in An Uncertain World (New York: Currency

Doubleday Publishers, 1991).

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